It was just after one of his late morning coaching sessions when McDowell interrupted him with an invitation to lunch. Sitting at a table in the nearby Greek cafe they had enjoyed dozens of times before, McDowell seemed out of sorts. Their regular waitress instinctively brought them two cups of coffee. Stephen noticed that McDowell spent a silent couple of minutes perusing over the menu, an act which seemed odd for a man who had ordered the same chicken shawarma platter with hummus, rice and a side of falafel every time they had eaten here.
Resting the open menu on his plate as if to express his frustration with being unable to make a meal selection, McDowell took a deep breath and spoke. “Stephen, I need to share something with you.”
Stephen’s guard went up as it was highly out of character for a self-proclaimed king of small talk to launch straight into business before ordering.
“The industry is taking a major hit. I think you know it’s had a major impact on us and well, to be transparent, the company’s not doing very well, Stephen.”
Stephen knew Mr. McDowell well enough to know what to expect but he always saw the older man as incredibly smart with a borderline addiction to optimism. There was a gloom on his boss’ expression that Stephen had never seen before. Times were tough, this was common knowledge and Stephen knew McDowell had been under heavy stress with their investment bankers. He had read plenty about the expectation of a continued downturn in the economy, but Stephen didn’t see a reason for panic. The company had withstood market swings and commercial real estate was still considered to be an industry relatively resistant to the collapse in the residential housing market.
“Mr. McDowell, we’ve seen tough times before.” Stephen chimed in. But even before the words finished escaping his lips, Stephen could tell McDowell would give no legitimacy to flippant and uninformed attempts at encouragement.
“You know,” McDowell seemed to express a deep pondering, “When we bought First Jefferson a couple of years ago I was sure it would take us to the next level.”
The acquisition had seemed a bit odd to Stephen. Their firm had historically been a real estate investment company that bought, sold or brokered commercial real estate properties. When McDowell led the company to buy First Jefferson Mortgage Group, Stephen just assumed it was a way for the company to move into the residential mortgage lending business. It wasn’t McDowell’s core business but from an expansion perspective, Stephen trusted the boss to know what he was doing. For Stephen’s part, he didn’t know the first thing about residential property, much less the complexities behind administering residential lending instruments.
“I thought I saw a huge payday for the company.” McDowell confessed, “I knew we were overpaying for their book assets but what did it matter? Investors are more interested in profits than they are free cash flow. The revenue from these loans would have given us a good shot at breaking even in two years and then double our annual revenue by the third. The bankers told me those projections were rock-solid!”
Stephen could tell McDowell believed what he was saying, or at least, he had believed it at one point.
He continued undeterred. “This was a chance for us to diversify our revenue streams and then break out with a public offering to take this company to new heights. The profit margins were enormous and besides, we were supposed to have protection on several of the subprime mortgages by purchasing the collateralized debt obligations from the insurance companies.” McDowell’s voice faded.
Stephen had no idea what collateralized debt was or why their company needed insurance but he could tell there was more so he let McDowell continue talking.
McDowell’s voice dampened, “You probably heard, at the end of last year, the housing market hit a brick wall. Our insurer stopped selling credit protection on the CDOs four months ago. Now the market is tightening and the subprime assets we bought from First Jefferson are showing a 300% increase in defaults. As an extra smack in the face, our New York investment bankers suggested we ‘postpone’ the IPO for a quarter or two. The fact they won’t even take my call anymore tells me just how interested they are in taking us public now.”
The jargon was completely lost on Stephen. He was confused and concerned. His friend was clearly distressed and Stephen didn’t have any idea of what he was talking about, much less how to help him fix it.
“It’s not just us. Stephen, this whole mortgage market is going to collapse. There are companies out there, major financial firms, who have jumped into this business with both feet. They’re going to get their rears handed to them. It’s going to crush them.”
“Wait, by major firms are you talking about publicly traded companies?” Stephen was starting to catch on that this really was bigger than McDowell and Associates.
“I’m talking about Fortune 100 international banks and brokerage firms who employ thousands and thousands of people. They’re just as caught up in these mortgage investments and they don’t have the first clue how the game works. They’re going to get hammered and when they do the repercussions are going to hit the whole country, regardless of what industry people are in.”
“Okay. That sounds bad,” he heard himself saying. Stephen had caught up with conversation and decided it was time to look at solutions. “So we’ll have to rely on the commercial investing to carry us through. Our bread and butter, right? It might get tough but we’re good at it and we’ve always made a profit in this business.” Stephen didn’t understand the subprime market or why McDowell had gotten them into this mess, but they were good at one thing and he saw no reason not to go straight back to it.
“I wish it were that easy, Stephen. The banks slashed our credit so we had to start floating our own projects. We’ve also been selling our commercial assets on the cheap to try to generate enough cash to keep operations going.”
“To keep operations going?” Stephen blurted out in shock. His words collapsed as if gravity had just been introduced to them.
McDowell ignored the interruption and continued, “However, housing is expected to continue dropping like a rock and there’s a realistic concern it will spill into the commercial market next. As a result, our investors have stopped looking at commercial properties and that bread and butter business of ours is drying up. I’ve been told our residential default rates will continue to accelerate and we still have to float the commercial properties we own. The bottom line is that we don’t have enough revenue to support our overhead anymore.”
“Mr. McDowell?” A tone of parental seriousness washed over Stephen’s voice, “What are you trying to tell me?”
McDowell’s eyes wouldn’t meet Stephen’s and instead drilled a hold through the cup of coffee resting between his palms. His voice was firm but strained. “It means, Stephen… that I have to let you go.”
Stephen’s mind went blank for a moment. After everything that had happened at home and at war, one of the few stable things in his life was his career at McDowell & Associates. What some could have seen as mundane or monotonous, he relished as predictable and reliable. Home life had been a tedious routine of arguments with Sarah. The ever-volatile ride of Hailey’s health concerns, the daily attempts to regain his own physical stamina and strength, he felt turbulence in every other part of his life except for work. Coming into the office each day provided him the distraction he needed. After the war, the pain, and rehab he knew that the stability of his daily work routine was the start of getting his life back to normal again. His work gave him consistency and satisfaction. It gave him something to look forward to.